House Hearing, 112TH Congress - Defer No More: The Need To Repeal The 3% Withholding Provision

DEFER NO MORE: THE NEED TO REPEAL THE
3% WITHHOLDING PROVISION
HEARING
BEFORE THE
SUBCOMMITTEE ON CONTRACTING AND

WORKFORCE
OF THE
COMMITTEE ON SMALL BUSINESS

UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
HEARING HELD
MAY 26, 2011
Small Business Committee Document Number 112017

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HOUSE COMMITTEE ON SMALL BUSINESS

SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
ZQUEZ, New York, Ranking Member
NYDIA VELA
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
LORI SALLEY, Staff Director

PAUL SASS, Deputy Staff Director
BARRY PINELES, Chief Counsel
MICHAEL DAY, Minority Staff Director
(II)
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CONTENTS
Page
OPENING STATEMENTS
Hon. Mick Mulvaney ...............................................................................................
Hon. Judy Chu .........................................................................................................
1
3
WITNESSES
The Honorable Wally Herger, U.S. House of Representatives, Washington,
DC ..........................................................................................................................
Mr. Curtis M. Loftis Jr., Treasurer, State of South Carolina, Columbia, SC .....
Mr. Brian George, Deputy Director, Office of Cost, Pricing & Finance, U.S.
Department of Defense, Washington, DC ..........................................................
Mr. Dave McDermott, Director, Standards and Compliance, Defense Finance
and Accounting Service, U.S. Department of Defense, Washington, DC ........
Mr. Mike Murphy, President, Turner Murphy Construction, Rock Hill, SC ......
Mr. Ian Frost, Principal, EEE Consulting, Inc., Mechanicsville, VA ..................
Mr. James M. Gaffney, Vice President, Goshen Mechanical Inc., Malvern,
PA ..........................................................................................................................
Ms. Kara M. Sacilotto, Partner, Wiley Rein LLP, Washington, DC ....................
5
10
11
13
18
20
22
24
APPENDIX
Prepared Statements:
The Honorable Wally Herger, U.S. House of Representatives, Washington,
DC ..........................................................................................................................
Mr. Brian George, Deputy Director, Office of Cost, Pricing & Finance, U.S.
Department of Defense, Washington, DC ..........................................................
Mr. Curtis M. Loftis Jr., Treasurer, State of South Carolina, Columbia, SC .....
Mr. Mike Murphy, President, Turner Murphy Construction, Rock Hill, SC ......
Mr. Ian Frost, Principal, EEE Consulting, Inc., Mechanicsville, VA ..................
Mr. James M. Gaffney, Vice President, Goshen Mechanical Inc., Malvern,
PA ..........................................................................................................................
Ms. Kara M. Sacilotto, Partner, Wiley Rein LLP, Washington, DC ....................
Statements for the Record:
Airports Council International-North America .....................................................
American Farm Bureau Federation .......................................................................
AICPA .......................................................................................................................
American Healthcare Association ...........................................................................
American Logistics Association ..............................................................................
American Medical Association ................................................................................
American Trucking Association ..............................................................................
Associated Builders and Contractors Inc. ..............................................................
The Coalition for Government Procurement .........................................................
CTIA the Wireless Association ...............................................................................
The Computing Technology Industry Association .................................................
Construction Industry Round Table .......................................................................
Energy Systems Group ............................................................................................
The Engineering and Utility Contractors Association ..........................................
Florida Airports Council ..........................................................................................
Government Withholding Relief Coalition .............................................................
Miami-Dade Board of County Commissioners ......................................................
National Association of College and University Business Officers ......................
National Association of Manufacturers ..................................................................
National Association of Surety Bond Producers ...................................................
National Association of State Auditors, Comptrollers and Treasurer .................
(III)
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44
48
54
58
71
91
95
97
101
104
110
115
118
126
129
130
136
139
141
142
144
150
163
165
169
171
IV
Page
National Defense Industrial Association ...............................................................

National Electrical Contractors Association ..........................................................
National Roofing Contractors Association .............................................................
Orange County Board of Supervisors .....................................................................
Riverside County Board of Supervisors .................................................................
Santa Barbara County Board of Supervisors ........................................................
The University of Illinois ........................................................................................
U.S. Chamber of Commerce ....................................................................................
Women Construction Owners & Executives, USA ................................................
Women impacting Public Policy (WIPP) ................................................................
Ventura County Board of Supervisors ...................................................................
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DEFER NO MORE: THE NEED TO REPEAL THE

3% WITHHOLDING PROVISION
THURSDAY, MAY 26, 2011
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
SUBCOMMITTEE ON CONTRACTING AND WORKFORCE,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building. Hon. Mick Mulvaney (chairman of the Subcommittee) presiding.
Present: Representatives Mulvaney, West, Landry, Ellmers, Chu,
Schrader, Kritz.
Chairman MULVANEY. I am going to call this meeting to order.
I thank all the witnesses for being here today. We look forward to
everybodys testimony.
I am pleased to spend this, which is my first hearing as a chairman of this Subcommittee, focusing on a government policy that is
such a bad idea that when it was first enacted in 2006, Congress
immediately delayed its implementation for five years. And when
2011 rolled around, Congress again delayed implementation of this
3 percent withholding requirement for another year. Now the IRS
is causing further delays of the withholding requirements until
2013 because, as the IRS says, implementation of it would simply
be too difficult, even though they have had six years to get ready
for its implementation.
Since no one seems too interested in implementing this policy,
hopefully this hearing can build on this Congresss successful bipartisan repeal of the 1099 reporting requirements and serve as
the starting point for a congressional action to repeal this 3 percent
withholding requirement. The original intent of this withholding
was to close the tax gap. In other words, 3 percent withholding was
supposed to reduce the amount of taxes that were owed by government contractors but that went unpaid. So in that sense it is very
similar to the 1099 reporting requirements that we took up already
earlier this year in this Committee and that this Congress subsequently repealed. Both the 1099 reporting and the 3 percent withholding requirements sought to close the tax gap through increased
burdens on businesses of all types. But small business, as so often
is the case, were hurt the most.
Small businesses today already operate on thin profit margins
with little room for any additional withholdings. As has been discussed in this Committee regularly this year, regulatory burdens
fall particularly harshly on small business. And the 3 percent withholding requirement would be no exception. Many small business
(1)
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contractors, including those folks testifying here today, work for the
government for less than a 3 percent profit margin. So the 3 percent requirement would force these contractors to wait until the
end of the year, not only to get their profit but also to cover all of
their costs.
Also troubling is the possibility that government contractors will
not have the funds to pay their subs during a project and will have
to find outside financing to complete projects. And I think all of us
who are related or involved in the small business community these
days know how much fun it is these days to try and get outside
credit.
Even worse is the fact that implementing this 3 percent withholding requirement means treating all small businesses and their
contractors with suspicion. Instead of rewarding those small businesses that choose to compete for and win contracts, the government essentially preaccuses them of cheating on their taxes. The
government already requires all contractors to certify that they are
in compliance with federal tax law. So one is left to wonder why
we assume that they are going to break the law after they win a
government contract.
Furthermore, there is a burdenbelieve it or not, this is so often
the case in what we do in Washingtonthere is actually a burden
on state and local governments as well. I look forward to taking the
testimony today of the stateof the treasurer from my home state
of South Carolina as to the impact on the states. And there is a
very real impact on the states. It is yet another unfunded federal
mandate in this 3 percent withholding requirement.
We also have witnesses from the Defense Department with us
today to testify as to the great expenses that this withholding requirement will impose and how these expenses far exceed any projections for additional tax revenue. It makes absolutely no sense for
the DOD to spend $17 billion over five years to save less than $6
billion on the first year and only $200 million a year after that.
The Joint Committee on Taxation has actually predicted that after
the first year, all increases in revenues to the government from
this proposed 3 percent withholding will come from interest that
the government earns on the withholding. It is essentially forcing
small business and other contractors with the government to float
the government an additional 3 percent. It is completely outrageous
and I look forward to hearing from the small businesses today that
will testify as to the other ways that the 3 percent withholding requirement will affect them.
We have three really good panels today, but I also want to acknowledge all of the organizations that submitted information for
the record. We have over 30 statements and I would love to read
the list. There are about 35 organizations in here. I mean to slight
nobody but this really is a whos who of American small business.
Everybody who is involved in this industry from A to Z is just
checked in on this 3 percent withholding bill and I really appreciate the effort that they have made. And this will be extraordinarily helpful to us as this Committee willthe testimony will be
today in pushing this initiative further through this Congress.
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Here is how we are going to work it today, folks. Ordinarilyoh,
by the way, I ask unanimous consent that those be added to the
record. And hearing no objection, it is so ordered.
Here is how we want to do it today before I recognize the ranking member. And I apologize for speaking very quickly. It is not
something ordinarily we do in South Carolina, but I have been informed that we may begin voting today as early as 11:30. I have
been through enough hearings in Washington to recognize what
happens when Subcommittee hearings are interrupted by votes,
which is that nobody comes back afterwards. And especially today,
given the number of amendments that we may be taking up on the
floor, these votes may take well over an hour and maybe possibly
two or three. So in the interest of time we will be asking folks to
try and stick to the five-minute limit. And we will not engage in
as much back and forth as you ordinarily might hear from us because we do want to make sure everybody gets a chance to get
their statements in the record.
So with that I recognize the Ranking Member Chu for her opening statement.
[The information follows:]
Ms. CHU. Thank you so much. I thank the gentleman from South
Carolina, Chairman Mulvaney, for yielding.
Todays hearing will focus on an issue that could impact millions
of small businesses across the country contracting with the federal
government. The United States Federal Government is the largest
purchaser of goods and services in the world purchasing more than
$425 billion per year. And small businesses play an integral role
in meeting the needs of the federal government. In fact, federal
agencies are required to establish contracting goals with a total of
23 percent of all government buying targeted to small firms.
Therefore, any policy that could hamper the ability of small firms
to do business with government must be looked at carefully. While
there is often little agreement in Congress on many policies, there
is bipartisan consensus that the issue of the 3 percent withholding
requirement on all government contracts needs to be addressed.
The original intent of the law was to prevent government money
from going to individuals and companies with outstanding tax
debts. However, as the law was written, the withholding will apply
to virtually all contractors, even if they do not have a tax liability
or other delinquency.
Like the 1099 filing requirement that was recently repealed by
Congress, the reasoning behind the 3 percent withholding requirement was to increase tax compliance and reduce the tax gap. However, this is another instance where a broad brush approach has
harsh consequences for small firms. First, 3 percent of a contract
often represents the estimated profit or operating cash flow for
small firms in the construction industry. This money could be used
by contractors to compensate for material costs, supplies, and other
operating expenses. The withholding requirement will force many
small firms to divert funds needed to complete a contract, creating
cash flow problems. At a time when small firms are still having a
hard time accessing credit from banks, laws like this create another barrier for small firms seeking to do business with the government. The new mandate will have an adverse effect on the
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smallest of firms since many prime contractors may be compelled

to pass the costs associated with the 3 percent withholding requirement to their subcontractors.
Additionally, government agencies have voiced a concern that administering the 3 percent withholding requirement will create more
costs than benefits. The Department of Defense issued a report
that implementing this could cost $17 billion for the first five years
alone, far outweighing the revenue brought in. State and local governments have also actively fought to repeal the 3 percent withholding since it represents an unfunded mandate at a time when
state and local budgets are stretched to the limit. In fact, many
state and local agencies do not have the internal processes and systems to withhold payments and track them. Although the implementation of this law has been delayed, now is the time to fully
repeal this onerous provision.
At a time when America needs to promote economic activity, the
3 percent withholding only hampers transactions between businesses and the government. If Congress does not act, businesses
will face additional paperwork every time they sell goods and services to the government. As the economy continues improving, small
businesses need to focus on what they do best, developing innovative new services, bringing additional products to market, and creating jobs. And while it is important to enact policies that ensure
taxpayers are paying their fair share of taxes, overreaching policies
do not serve that purpose. There is bipartisan support for this repeal and doing so will allow small firms to continue to perform
quality work on behalf of the public.
With that I would like to welcome Congressman Herger to the
Committee, as well as the witnesses who have taken time from
their busy schedules to testify here today.
I yield back.
[The information follows:]
Chairman MULVANEY. Thank you, Ms. Chu.
Very briefly, just for the folks who have gathered here and for
the folks especially who are here for the first time, including the
folks who are testifying for the first time, why are we here? We are
here to sort of take the testimony and build a record. It is the job
of this Committee to take information about Mr. Hergers bill that
we will hear about in a few minutes and then make recommendations and report back to the Ways and Means Subcommittee with
hopes that they will then approve this bill, bring it to the floor so
that we can vote on it, and then send it to the Senate.
Towards that end, you saw the book that we have. That is part
of the record. The other record will be made up today by the testimony of the three different panels.
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STATEMENTS OF WALLY HERGER, U.S. HOUSE OF REPRESENTATIVES; CURTIS M. LOFTIS, JR., TREASURER, STATE OF
SOUTH CAROLINA; BRIAN GEORGE, DEPUTY DIRECTOR, OFFICE OF COST, PRICING AND FINANCE, U.S. DEPARTMENT
OF DEFENSE; MIKE MURPHY, PRESIDENT, TURNER MURPHY
CONSTRUCTION, ASSOCIATED GENERAL CONTRACTORS; IAN
FROST, PRESIDENT, EEE CONSULTING, INC., AMERICAN
COUNCIL OF ENGINEERING COMPANIES; JAMES M.
GAFFNEY, PRESIDENT, GOSHEN MECHANICAL, INC., QUALITY CONSTRUCTION ALLIANCE; KARA M. SACILOTTO, PARTNER, WILEY REIN, LLP
Chairman MULVANEY. And our first panelist is our colleague,

Congressman Wally Herger. He serves on the House Committee on
Ways and Means. In that role, his primary legislative concerns include security economic growth and encouraging innovation and entrepreneurship by reducing the tax burden on Americas families
and small business. He is also interested in making government
run more efficiently by reducing federal regulatory burdens and
spending and responsibly reforming entitlement programs to make
them sustainable and ensure that they will be around for the future generations.
Congressman Herger is the sponsor of H.R. 674, of which I am
proud to be a co-sponsor, and which seeks to repeal the 3 percent
withholding provision which is the bill we are here today to discuss.
Congressman, welcome. And we look forward to your testimony.
STATEMENT OF WALLY HERGER
Mr. HERGER. Chairman Mulvaney, Ranking Member Chu, and

members of the Subcommittee, thank you for holding this hearing
on the need to repeal the 3 percent withholding tax on government
contracts.
As someone who has been passionately opposed to this tax from
the day it was first signed into law, I am encouraged by the Committees interest in this issue. Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 requires government agencies at all levelsfederal, state, and localto withhold 3 percent
of payments for goods and services effective in 2012. The Internal
Revenue Service has recently issued regulations delaying this requirement until January 1, 2013, but agencies and businesses must
still plan for it to eventually take effect. The breadth of this 3 percent withholding tax is truly astounding. It affects everyone, from
the manufacturer who builds tanks for the Army, to the nursing
home that cares for poor seniors on Medicaid, from the construction
workers who repair roads and levees, to the commissaries that sell
groceries to families on military bases.
As the members of this Subcommittee are well aware, small businesses are the lifeblood of our economy. I come from a small business background myself, so I have firsthand knowledge of how our
countrys entrepreneurs and job creators are burdened by a complex tax code and cumbersome regulations. If the 3 percent withholding tax is permitted to go into effect, it will only add to that
burden. Many businesses that contract with the government operate on very narrow profit margins, often less than 3 percent. As a
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result, this tax will create serious cash flow problems for small
businesses.
Today our economy is in poor condition. The stock market may
have improved from the low point of the recession but for most
Americans the signs of recovery have been few and far between.
Millions of people are still without work. In my Northern California
congressional district, some counties have more than 20 percent
unemployment. Government regulations and taxes that were a bad
idea even in happier times are absolutely disastrous when our
economy is struggling to recover and create jobs.
In addition to its impact on small businesses, the recession has
also taken a toll on state and local government finances. Cities,
counties, and states across America are struggling to balance the
budget without raising taxes or slashing vital services. The 3 percent withholding tax would worsen this fiscal crisis by creating new
administrative costs and potentially raising procurement costs for
state and local governments.
Supporters of the 3 percent withholding requirement have billed
it as a tax-compliance measure. Yes, it is a problem when government contractors do not pay their taxes. But instead of slapping a
new tax on everyone, a tax that will actually cost the government
more to collect than it raises in revenues, we could simply stop
awarding government contracts to people who cheat on their taxes.
In fact, since the 3 percent withholding provision became law, OMB
and Treasury Department have announced several initiatives to do
just that. Hopefully, these new compliance measures will provide
the final push for Congress to repeal 3 percent withholding once
and for all.
Again, I appreciate the opportunity to testify this morning, and
I look forward to working with the chairman and other members
of this Committee to move ahead with repeal.
[The statement of Mr. Herger follows:]
Chairman MULVANEY. Thank you, Mr. Herger. Very briefly, I
have one question. It just came up and was presented to me a day
or two ago when I was talking about this bill.
And I think there was a GAO report that came out last week or
early this week that indicated that there were as many as 37 recipients of grants or contracts under the Recovery Act who owed
taxes. Thirty-seven hundred folks who got government contracts or
government grants under the stimulus program actually owed
taxes. And I think the total amount that they estimated that they
owed was $750 million. So the question was put to me and I will
put it to you, which is against that background, why is this bill still
a really good idea?
Mr. HERGER. Well, again, I do not think it isfirst of all, everyone should be paying their taxes and we should be moving in a judicious way that makes sense to ensure that those who are not
paying their taxes do. We might point out this is a small percentage that do not pay their taxes. We should not be penalizing the
masses who do pay their taxes just for those who are not. I believe
the government has taken steps to correct this. We need to take
further steps. As a matter of fact, one quarter of those who did not
pay their taxes we were able to find out and we were able to deal
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with and again, there are more judicious ways to do this than penalizing everyone.
Chairman MULVANEY. Thank you, Mr. Herger. I yield now to Ms.
Chu for any questions.
Ms. CHU. Congressmember Herger, the repeal of the 3 percent
withholding seems to have broad bipartisan support. It is clear that
both parties want this fixed and small businesses want it done
quickly. And the title of this hearing is Delay No More: Repeal. So
when does your Committee anticipate marking up this bill or taking any other substantive action to repeal it?
Mr. HERGER. Chairman Camp, chairman of the Ways and Means
Committee, has indicated his support. As you know, there is a lot
going on in Ways and Means now with health care and a number
of other areas. So we arethe fact that we are having this hearing
today, the fact of the growing support around the nation I think
helps put this more to the importance of bringing this sooner than
later that we will have a markup on it in Ways and Means.
Ms. CHU. Chairmanwell, I actually have another question.
Congressman Herger, we know that when companies do not pay
their fair share of taxes it creates an unlevel playing field. I believe
this measure was enacted as a tax gap proposal. Do you believe
that there are measures that could be put in place to close the tax
gap and help level the playing field for honest small businesses? If
so, could you share some of those with us?
Mr. HERGER. Absolutely there are. And I think we are moving towards it now. As I mentioned, one-quarter of that amount that we
indicated that had not been paid, by new measures that have been
put into place we have already been able to determine those onequarter. And we need to continue taking stronger measures. But a
measure like the 3 percent, that penalizes everyone. The masses
who are paying their taxes is not the way to go about this and we
need to keep the pressure on so that everyone pays their taxes.
Ms. CHU. Thank you. I yield back.
Chairman MULVANEY. Thank you. I recognize the gentleman
from Florida, Mr. West, for up to five minutes.
Mr. WEST. Thank you, Mr. Chairman.
My colleague, Mr. Herger, I only have one question. You know,
having served 22 years in the United States military and retiring
thereof, and of course when you talk about the effect upon commissaries and exchanges, do you see that possibly with this 3 percent withholding tax, that the Department of Defense may then
push the cost against the individuals who are using the commissary and exchanges to include our retiree community?
Mr. HERGER. I do not think there is any doubt about that. This
will increase the cost to commissaries and I am sure that this
costit would be very difficult. As you know, the military is running very frugally now and I think it is very likely that these costs
will be passed on. And therefore, our men and women in the military will have to pay more than they would otherwise.
Mr. WEST. Thank you, Mr. Chairman. I yield back.
from Louisiana, Mr. Landry, for up to five minutes.
Mr. LANDRY. Mr. Herger, I am just curiouswhose brainchild
was this in 2005? I know thisit originated in the Senate. It was
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something that was tagged onto a legislation in the latter hours
going through. Part of an omnibus pay-for. You do not know who
in the Senate
Mr. HERGER. Well, I think it is public knowledge who has been
supporting this.
Mr. LANDRY. I do not know. That is why I am asking.
Mr. HERGER. It came through the Finance Committee of the Senate.
Mr. LANDRY. Because it just seems to me that this automatically
increases governments cost. I mean, companies who are operating
on thin margins and need cash flow, when they are going to bid
on these projects they are going to have to factor this in. So that
just increases our costs. I am just trying to figure out as a freshman here how people come up with ridiculous legislation like this.
Mr. HERGER. Well, giving them the benefit of the doubt I have
to believe that it was well meaning. I am sure they thought, well,
we will just withhold 3 percent. That way we will make sure that
we collect it. But again, I think it is obvious as we look at it and
analyze it, it was something that was not well thought out. And
certainly as we are hearing from our small business people. And
not just the small business, but as was mentioned, just the Department of Defense. It was estimated it was going to cost them an additional $17 billion to implement this. So I think as we analyze it,
something that might have started off well meaning, certainly we
can see the repercussions are very, very derogatory and negative
and something we need to correct sooner than later.
Mr. LANDRY. But what I do not understand is they must have
known it would have had some sort of impact because they kicked
the can down the road to 2010. And then of course they realized
that it was a problem and they kicked it down again and now it
is in our lap. I am trying to figure out, you know, I guess what they
think about when they pass legislation like this. I know it is like
a feel-good piece of legislation telling the American people that, you
know, we are going to do something for tax cheats when really
what we should be doing is letting the IRS go in and enforce those
provisions. So I was justI was trying to get a little bitI know
you have been here for a long time and so I am trying to get some
wise advice, I guess, today.
Mr. HERGER. Mr. Landry, I think the wise advice is coming from
new members like yourself that have been out in the real world.
I think the bottom line is as has happened so often, well meaning
legislation many times has not been thought out and how it really
affects regular people that are out in America trying to make a living for their family, trying to grow their business and hire new people.
This is certainly one of those, I would say, pieces of legislation
that was intended to collect taxes that were not being paid that I
believe was not thought through very well at the time. It might
have beenI am sure it was well meaning. I have to believe it was
well meaning at the time, but we can certainlywhat is important
is that at this time we can see it is not working. It is very harmful
to small business at a time when we need to be growing jobs and
expanding our economy. This is the type of legislation that is working exactly in the opposite direction.
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Mr. LANDRY. Well, I want to thank you because that is why I
came to Congress, to vote on legislation just like this. So I certainly
hope that Ways and Means takes it up.
Thank you. I yield back.
Chairman MULVANEY. Mr. Herger, thank you again. I appreciate
you coming in, and thank you for offering the bill this year.
Mr. HERGER. Thank you. And again, I want to thank this Committee. I want to thank you, Mr. Chairman, who also is a new
member. I compliment you for being chairman.
Chairman MULVANEY. And a small businessman, so I really appreciate it.
Mr. HERGER. A small business one. And this is the type, as well
as Mr. West and some others, this is the time to correct this.
Thank you for your emphasis. Working together we will repeal this.
Chairman MULVANEY. Thank you, Mr. Herger.
I will ask the Committee to go ahead and begin to seat the second panel if we can.
And while the second panelists are coming up, a word to all of
the panelists. There are those little crazy lights in front of you.
They are green, yellow, and red. It will be green for the first four
minutes, yellow for the second minute, and then turn red. We usually do let you go a few minutes beyond if you like. Today we would
like, again, to try and keep as close as we can because of the time
constraints that we are under. If you start to hear this tapping motion, that means that we are asking you to please wrap things up
as quickly as you possibly can.
The second panel has two government witnesses. First, I am
pleased to welcome Mr. Curtis Loftis, Jr. Mr. Loftis was elected
treasurer of the great state of South Carolina in November of last
year. In this role, Mr. Loftis is responsible for the investment, cash
management, and safekeeping of the states general and restricted
funds, and also the assets of the South Carolina Retirement Systems. He also serves as the vice chairman of our State Budget and
Control Board, which handles the State Procurement programs,
state insurance, the Budget office, the State Auditors office, State
Human Resources office, the General Services offices, the Budget
office, and the State Technology office. Prior to running for office,
Mr. Loftis owned and operated a very successful small business in
West Columbia. Welcome Mr. Loftis.
I would also like to welcome at the same time our second witness, Mr. Brian George. He is the deputy director of the Office of
Cost, Pricing, and Finance, Defense Procurement and Acquisition
Policy, where he is the lead for reinvigorating costs and pricing
skills within the Defense Department and advises the director on
issues relating to contract costs, pricing, and finance.
He is accompanied by Mr. David McDermott, the director of
Standards, Compliance, Defense Finance, and Accounting Service.
Mr. Dermott is responsible for developing finance and accounting
goals and standards and analyzing operational results. Mr. George
is going to provide testimony on behalf of the Defense Department
and answer questions related to those issues. Mr. McDermott will
not be testifying but is also available to answer questions as well,
especially regarding the Defense accounting system. Gentlemen,
thank you.
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We will go ahead and recognize Mr. Loftis for his comments.
STATEMENT OF CURTIS M. LOFTIS, JR.
Mr. LOFTIS. Thank you, sir. Mr. Chairman, members of the Committee, I am honored to be here today.
Mr. Chairman and members of the Committee, I am very honored to be here today. I urge the repeal of the federal 3 percent
withholding provision. Section 511 imposes an arduous and costly
mandate. It will unfairly penalize state and local governments and
businesses that run honest, taxpaying companies. The impact and
unintended consequences of this requirement on both government
and private enterprise are serious. Expensive implementation costs
come during a time of a weak financial recovery. Compliance with
this recovery will prove oppressive, deprive entries, and will definitely cost us jobs. Of course, the taxpayer will have to pay the burden of this plan.
I am the Treasurer of South Carolina, but I am also a small businessman. I have three dozen employees in Columbia, so I have to
take these issues seriously. I would like to share with you how I
see the impact of all of this. First, let us look at the negative impacts on the state and local governments. The provision imposes
administrative costs and recording requirements for implementation and maintenance of the vendor tax withholding and the actual
payment of the tax on behalf of the vendors to the IRS. It will be
an administrative nightmare. There will be major modifications to
accounting systems and other administrative processes. The manpower and dollar costs of the provisions for the local and state government access across the country will be astronomical. Coupled
with administrative costs, many believe the vendors will increase
their prices to government in order to compensate for this penalty
tax. Again, as a result the taxpayers will pay more.
The withholding law will negatively affect governments budgets
at a time when every dollar counts. Smaller units of governments
may not be able to sustain the burden of administering this program. Federal tax enforcement is the function of the IRS and the
federal government, not of the state and local governments. The 3
percent withholding penalizes all tax-compliant businesses. It
forces them to provide the federal government with an interest-free
loan by requiring advanced payment on taxes which may not even
be due at the end of the year. The withholding is based on gross
revenues from contract payments and they may have no relationship to taxable income. Firms with tight profit margins will lose
funds necessary for vital operations. Cash flow may be damaged to
the point that some companies withdraw from doing business with
the government altogether. Business expansion could be halted or
deferred. Additional cash flow constraints can push some companies out of business altogether.
I am particularly concerned about what Section 511 does to my
home state. Small business is essential to the well-being of South
Carolina. In 2008, there were 364,000 small businesses in South
Carolina, and they account for 50 percent of the private sector jobs.
Small firms made up 97 percent of South Carolina employers.
Small business is the engine that drives South Carolinas economy.
The success of the small business sector is critical to our economic
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recovery. The withholding requirement will reduce the amount of
capital available for payroll, new business investment, and daily
expenses. South Carolinas unemployment rate in April placed us
at the ninth highest in the country.
Mr. Chairman, we need jobs, not more regulation. We need capital, not more taxes. There is a saying, an error we refuse to correct has many lives. I believe the negative consequences of this
mandate will snowball, so I strongly urge the members of this
Committee and the House to take action as quickly as possible to
repeal Section 511. I would like to commend Representative Herger
for his work on H.R. 674, and also Mr. Chairman, I would like to
give a special thank you to my fellow South Carolinian for allowing
me to come and speak to you on behalf of the state and local governments in South Carolina.
[The statement of Mr. Loftis follows:]
Chairman MULVANEY. Thank you, Mr. Loftis. I appreciate that
very much.
Mr. George, if you will go ahead and give your testimony, then
we will ask questions of the panel as a group.
STATEMENT OF BRIAN GEORGE
Mr. GEORGE. Chairman Mulvaney, Congresswoman Chu, and

distinguished members of the Subcommittee on Contracting and
Work Force. I welcome the opportunity to appear before you today
to discuss the Departments Report to Congress.
Our 2008 report addressed the impacts of compliance with Section 511 of the Tax Increase Prevention and Reconciliation Act of
2005. My name is Brian George, and I serve as the Deputy Director
in the Office of Cost, Pricing and Finance for the Defense Department. My organization prepared the 2008 report.
With me today is Mr. David McDermott, the Director for Standards and Compliance at the Defense Finance and Accounting Service. He is responsible for overseeing the Comptrollers implementation of Section 511. Our report was submitted in response to the
Houses Committee and Armed Services request that the Department assess the impact of compliance with Section 511. As you are
well aware, Section 511 requires federal, state, and local governments to withhold and remit to the IRS 3 percent of payments
made to contractors for goods and services. At the time the report
was prepared, the IRS had not developed regulations to implement
the Section 511 withholds. As a result, our report was based on a
number of assumptions regarding how the IRS would implement
the withholds.
We originally estimated for implementation and then management for the first five years, $17 billion to comply with Section 511.
This included about $4 billion related to the Department losing the
use of the commercial purchase card and about $13 billion related
to contractors costs. The Department still expects the impact to
comply with Section 511 to be in the billions of dollars but lower
than the original estimate. It will be lower since a few of our assumptions in 2008 differed from the final IRS regulations published this month. Let me discuss just two of those assumptions.
We correctly assumed the IRS would not allow companies to offset the amounts withheld under Section 511 against their esti-
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mated quarterly income or payroll tax payments. The report expressed our concern that contractors properly paying their tax obligations will experience cash shortages equal to the amounts withheld until the amounts are recovered through the normal federal
income tax process. However, we incorrectly assumed that the IRS
would not exclude third-party payments, such as the commercial
purchase card, from the 3 percent withhold. Our report stated that
if third-party payments were not excluded, DOD would lose its
ability to use the commercial purchase card. This would occur because the Department would not be able to execute withholds
against those payments. Almost $8 billion of our estimate related
to that impact. However, in its final rule, the IRS indicated that
it may require withholding of such transactions in the future.
Although the costs for DOD and our contractors to implement
Section 511 will be less than we estimated three years ago, we still
expect the impact to be significant. The Department is concerned
that Section 511 will restrict the available cash of tax-compliant
companies, especially small businesses and we are also concerned
the Department may lose its use of the commercial purchase card
in the future.
This concludes my verbal statement. Mr. McDermott, I will be
happy to address your questions and request that my written statement be entered into the record.
[The statement of Mr. George follows:]
Chairman MULVANEY. Thank you, gentlemen. And for all of the
witnesses, your witness statements have already been entered into
the record.
Very quick question. You hit on something, Mr. George, that
caught my attention, which is the $17 billion was roughly broken
into two pots$4 billion for this purchase card but $13 billion for
increased contractor costs. Tell me a little bit more about that. How
did you all arrive at the number? What is driving that number?
Mr. GEORGE. I will be glad to tell you about that.
Of the $13 billion for the contractor, about $4 billion related to
the purchase card, $9 billion related to implementation costs and
re-incurring costs to implement this rule.
Chairman MULVANEY. So to implement this particular regulation
would cost just the Department of Defensenot the whole federal
government, just the Department of Defense$9 billion?
Mr. GEORGE. Well, the $9 billion
Chairman MULVANEY. Million or billion, sir?
Mr. GEORGE. Billion.
Chairman MULVANEY. Okay.
Mr. GEORGE. Of the $9 billion, most of that is contractors cost.
Chairman MULVANEY. For them to implement it?
Mr. GEORGE. That is correct.
Chairman MULVANEY. Which is then passed on to us through
higher costs.
Mr. GEORGE. It could be passed on to us. That is correct.
Chairman MULVANEY. Exactly. Thank you, Mr. George.
Mr. Loftis, do wevery briefly, do we withhold in the state of
South Carolina in a system similar to that? Do we withhold for
taxes?
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Mr. LOFTIS. No, sir. We have a limited program for out-of-state
contractors who do work with the state but it is a state tax. Nothing for the federal government.
Chairman MULVANEY. So you would have to completely overhaul
your entire accounting system at the state, local, and county level
in order to implement this regulation.
Mr. LOFTIS. That is right. There are multiple agencies now, like
the Department of Revenue, the Treasurers Office, Comptroller
General, and others, the Budget Office, who are working on this all
without any certainty of where the program is going. So it equates
to a lot of wasted man-hours so far.
Chairman MULVANEY. I recognize Ms. Chu for as much time as
she needs.
Ms. CHU. Mr. George, we have talked about the implementation
costs for the DOD. Are you aware of any other agencies that have
conducted similar studies that analyze their costs in complying
with the 3 percent law?
Mr. GEORGE. No, maam. I am not familiar with any other agencies.
Ms. CHU. DOD, of course, is so large. Would you anticipate that
it might cost even more for smaller agencies to implement such a
withholding?
Mr. MCDERMOTT. I would be reluctant to answer for any other
agencies, Congresswoman Chu.
Ms. CHU. Well, then, Mr. McDermott, let me ask. The original intent of the 3 percent withholding was to stop tax cheats. It is a
laudable goal because there are many tax-compliant businesses
that are competing with these tax-avoiding businesses. However,
the 3 percent withholding provision will make honest taxpayers
face these enormous burdens under this law. As the Director on
Standards and Compliance, what other less burdensome methods
are available to the federal government to ensure that government
contractors are also good taxpayers?
Mr. MCDERMOTT. Congresswoman Chu, I can speak to what we
do today to ensure that we are working with companies that are
not delinquent on their taxes. In the beginning of the contracting
process, the contracting officers do check to see with the Contractor
Registration System to see if a contractor has been disbarred or for
some reason has some delinquency or other reason that they would
not do work with the government. For the agency that I work with,
we participate in a program called the Treasury Offset Program,
where we trade information with the Department of the Treasury,
approximately 13,000 payments a day that we share information
with the Treasury on that the Treasury looks to see if there are
any delinquencies either for taxes or other government debts. And
if there is such a debt, we offset the amount up to the amount of
the payment that we are looking at at that particular time. During
fiscal year 2010, we were able to liquidate 3,500approximately
3,500 debts. That is our main way of ensuring that we assist the
rest of our government partners in liquidating debts to include tax
debts.
Ms. CHU. How do you assess the success of this?
Mr. MCDERMOTT. We believe that it is a successful program by
virtue of the fact that we did find approximately 3,500 debts work-
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ing with the Treasury, and those were funds that were recouped
to the government that did not go to the contractor where we
would have to go after them after we had made that payment.
Ms. CHU. Mr. George or Mr. McDermott, small businesses provide the federal government with goods and services in a wide
range of services. Examples include construction contracts, retail,
and information technology services. From the DODs perspective,
are there any industries that would be disproportionately affected
by the 3 percent withholding requirement?
Mr. GEORGE. Maam, not from my perspective. I think small businesses would be hurt perhaps harder. And that is speculation on
my part. And let me just go back to the other question you asked
Mr. McDermott. One thing that has happened on the contracting
side since this law is passed is that contractors have to certify that
they are not tax delinquent to get a government contract. So that
is a significant step they have to go through now to get a contract.
It did not happen before.
Ms. CHU. Yes, Mr. McDermott.
Mr. MCDERMOTT. Congresswoman Chu, our applicability of this
would be across every organization that we do business with so I
cannot say that any one particular business would be disproportionately affected just by the withholding. Obviously, other things
that you have discussed about small businesses and the impact it
may have on that.
Ms. CHU. Mr. George, the SBA estimates that nearly 75 percent
of all small firms will fail within the first five years, while existing
firms may be able to absorb a 3 percent withholding, newly formed
firms are often the most cash strapped. At a time when we should
be promoting economic development, has your office done any assessment on the impact that the 3 percent requirement would have
on start-up companies?
Mr. GEORGE. We have not done that, but one thing we have tried
to do for small businesses, is we just implemented a new rule
where we can accelerate payments to small businesses. So we are
aware it is important to increase their cash flow, so we are trying
to do that as a Department.
from Florida, Mr. West, for five minutes.
Mr. WEST. Thank you, Mr. Chairman. My question is for you,
Mr. George and Mr. McDermott.
A couple of weeks ago I had a really good conversation with a
dear friend of mine, Colonel Pete Newell, who is the head of the
Rapid Equipping Force for the United States Army. Are you familiar with the Rapid Equipping Force mission?
Mr. MCDERMOTT. I am not.
Mr. GEORGE. Not personally.
Mr. WEST. Okay. The Rapid Equipping Force for the United
States Army, what they do is they go out into the combat theaters
of operation and they give recommendations from the soldiers that
are on the ground and then they come back here to look for small
businesses that can provide these requirements to these emerging
technologies that they do not have to go through an entire longdrawn-out procurement process. You know, my concern when I look
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at this, and I would like to get your estimate, do you think that
this 3 percent withholding provision would incentivize a lot of
small businesses to go into contracts that can enable us to provide,
you know, rapid technologies to our soldiers that are on the combat
theaters of operation right now?
Mr. GEORGE. Incentivize or decentivize?
Mr. WEST. Well, do you think that as it is right now this provision, will it incentivize people to go into, you know, contracts with
the United States Army to provide these emerging technologies for
our soldiers in the field?
Mr. GEORGE. I would speculate it would not incentivize them at
all.
Mr. WEST. Thank you very much. I yield back.
Chairman MULVANEY. Thank you. At this time I would like to
recognize the gentleman from Oregon, Mr. Schrader, for five minutes.
Mr. SCHRADER. Thank you, Mr. Chairman.
Since you are resident government experts, I will ask a couple
questions. And if you are unable to answer them I would understand.
The bill as originally conceived talked about some exceptions. Do
you all know the exceptions to the 3 percent withholding?
Mr. GEORGE. Off the top of my head, no.
Mr. SCHRADER. All right. Given the fact, and you alluded to it a
moment ago in your testimony, Mr. George, that there have been
some improvements and changes in how we are addressing some
of the delinquencies that have occurred. Could you elaborate a little
bit on some of the others that are out there that have occurred
since this bill was put in play and how that has hopefully, possibly
affected your ability to collect money you would otherwise not have
been able to collect from contractors?
Mr. GEORGE. Well, I would say there are two. One is on the contracting side and one is on the Comptroller side as we mentioned.
One is, again, very significant. They have to register if they have
$3,000 or more in delinquent taxes before they get a contract. The
contracting officer has to look at that, and if it is actually affirmative, they have to investigate that and may even refer that to the
Debarment Official if there is an affirmative response. On the
Comptrollers side, Mr. McDermott mentioned about the offset program as well. So those two things I think have been, at the prime
contract level, very successful.
Mr. SCHRADER. Are you able to quantify how much improvement
you have gotten and DOD, you know, how your collections have improved quantitatively as a result of those types of improvements?
Mr. MCDERMOTT. Congressman Schrader, for fiscal year 2010,
because of the Treasury Offset Program, we were able to collect on
approximately 3,500 instances of debt. I do not have the dollar
amount to be able to quantify that. But prior to the Treasury Offset program we were not sharing that type of information so that
would have been information we would not have had to offset those
payments.
Mr. SCHRADER. So that is good news. Without having to burden
small businesses you are making progress with some of the newer
regulations. Is it not also true that the acquisition forms and proc-
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esses would have to be changed at some cost to the federal government as a result of this law if it gets implemented?
Mr. GEORGE. On the acquisition side we would have to make
some changes to our systems and also on the Comptroller side. And
we would have to implement regulations to make sure we collect
the 3 percent withhold. That is correct.
Mr. SCHRADER. So to reiterate a point that I think is being made
here, we are only seeing the tip of the iceberg in terms of increased
cost to government contractors and small businesses as a result of
this 3 percent withholding?
Mr. GEORGE. There is definitely an increased cost. That is correct.
Mr. SCHRADER. I guess I will yield back, Mr. Chair. Thank you.
Chairman MULVANEY. Thank you, Mr. Schrader.
I recognize the gentle lady from North Carolina, Ms. Ellmers, for
up to five minutes.
Ms. ELLMERS. Thank you so much, Mr. Chairman.
My questions are going to be directed to each one of you. You
know, the cost of doing business in this country is extravagant and
we are losing jobs and we are not creating jobs because of it. Mr.
Loftis, in your opinion, does this 3 percent withholding increase
jobs or decrease jobs?
Mr. LOFTIS. Decreases jobs most decidedly.
Ms. ELLMERS. Mr. McDermott?
Mr. MCDERMOTT. That would be out of my area of expertise,
Congresswoman Ellmers, to answer.
Ms. ELLMERS. Well, from a common sense standpoint, if the cost
of doing business is increased for any small business company, contractor, does not that really equal the loss of jobs? That is one less
job for every regulation. Every tax that you have to adhere to, that
could possibly be a job that you are not creating. Would you not
agree?
Mr. MCDERMOTT. Congresswoman Ellmers, I cannot disagree
with you but I would not be able to base that on our estimates or
what we are doing to implement this law. But I cannot disagree
with you.
Ms. ELLMERS. So let me ask you this then. From a small business perspective, contractor perspective, do you believe, do you
agree that the cost will have to increase for consumers? That the
cost of doing business will go up because of this 3 percent increase?
Mr. MCDERMOTT. Again, Congresswoman Ellmers, I cannot say
for sure. I am sure there are a number of different ways that a
business person would look at this to try and compensate for it to
ensure that they have appropriate cash flow and to compensate for
their profit margins.
Ms. ELLMERS. Do you believe the revenue that has been found
or the tax advantage that you had mentioned that there were some
tax revenues that were found because of this, do you think that
that fully offsets the cost to our consumers?
Mr. MCDERMOTT. I do not have the exact dollar amount of what
we collected but I am quite positive that it would be less than what
we are estimating it would cost to implement this.
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Ms. ELLMERS. That it would be actually less? The money that is
actually generated for the government in tax revenue is actually
less than the cost to the business owner?
Mr. MCDERMOTT. From the Treasury Offset program, yes.
Ms. ELLMERS. Okay. Mr. George, could you
Mr. GEORGE. Let me answer that from a personal perspective. I
think when you mention it will increase costs, I think it will increase costs. At one time I was on the board of a small, not-forprofit small business. It was a school, on the Board of Directors,
and cash flow was incredibly important. And this will affect their
cash flow. And if you do not have cash, you cannot pay employees.
And that actually happened to us a few times. So I understand the
impact to small businesses.
Ms. ELLMERS. Yeah, you know, I mean, we are seeing this over
and over again. I had the opportunity back home last week when
we were in our district sitting down with small business owners,
some of them contractors, and the cost of doing business is so high
that they cannot create jobs. There are so many issues. Regulation
taxation is what is harming all of our businesses and that is why
we are not creating jobs in this country. You know, the private sector is where these jobs are created and until we deal with these
issues, we are going to continue to see this. We can turn this
around. It is just going to take a matter of all of us putting our
heads together.
Thank you. With that, Mr. Chairman, I yield back.
Chairman MULVANEY. Thank you, Ms. Ellmers.
I have one or two brief follow-up questions for Mr. Loftis. Mr.
Loftis, you mentioned in your testimony thatI think you said you
are already starting to try to implement this. Is that correct?
Mr. LOFTIS. Well, we have to study it. You know, the deadlines
keep being pushed back, so the CGs Office has spent a significant
amount of time. The Department of Revenue, I mean, all of these
offices, we study and then it gets put off. And then we study it and
it gets put off. We have to devote valuable man-time to it. The computer resources devoted to it and the changes needed are going to
be particularly expensive. We have just gone to a new statewide accounting program, which of course will have to be altered.
Chairman MULVANEY. And is that replicated at the counties and
the town levels as well?
Mr. LOFTIS. Counties and towns will have a very difficult time.
You know, I think the threshold that you could drop below that you
do not have to mind this regulation is $100 million. But for counties that have hospitals or school districts, that is not very hard to
get through at all. And they are just not equipped. Treasurers offices in some of the counties may be two people.
Chairman MULVANEY. You know, we talk oftentimes up here
about the importance of making permanent changes as opposed to
continually making temporary changes. In your mind is there a difference between a one or two year extension and just a complete
removal of this requirement?
Mr. LOFTIS. The complete removal would be great. The uncertainty breeds just that, uncertainty, and that costs us money.
Chairman MULVANEY. And how many contracts approximately is
the state of South Carolina going to be impacted in?
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Mr. LOFTIS. Well, it is funny you ask that because I tried to find
that out. And we do not know because the contractor process is so
old it has never been brought on computers like it should be. So
this is one of the problems. So when we started investigating
whether or not we will have to have arbitration contracts that were
multi-year extend into this period, we just do not know.
Chairman MULVANEY. Is there any reason to think it is going to
be better in any of the other states?
Mr. LOFTIS. I cannot imagine, no. We are relatively small. I
would think it would be awful in a state like California or Texas
or New York.
Chairman MULVANEY. I cannot imagine the headaches they
would have.
Gentlemen, thank you very much. I really appreciate your time.
Does anyone have any follow-up questions? Thank you again.
At this time I would like to seat our third panel. The final panel
is made up of three small business witnesses and a government
contracts expert.
The first witness is Mr. Mike Murphy, president of Murphy Turner Company, Inc., a third-generation, family-owned general contractor specializing in water and waste water treatment plants. He
is also from Rock Hill, South Carolina. Mr. Murphy is testifying on
behalf of the Associated General Contractors of America. I am especially pleased to welcome Mr. Murphy as he is one of my constituents.
We also have with us Mr. Ian Frost, a principal at EEE Consulting in Mechanicsville, Virginia. He is testifying on behalf of the
American Council of Engineering Companies. Mr. Frost, welcome
as well.
And we have Mr. James Gaffney, vice president of Goshen Mechanical in Malvern, Pennsylvania, testifying on behalf of Quality
Construction Alliance.
And we also have an additional witness who will be introduced
by the ranking member, Ms. Chu.
Ms. CHU. Thank you, Mr. Chair.
It is my pleasure to introduce Kara Sacilotto, who is a partner
with the law firm Wiley Rein Law Firm and is an expert in federal
procurement law and policy. She has extensive experience in litigation matters relating to government contracts, including bid protests, claims litigation, prime subcontractor disputes, and trade secret misappropriation litigation. She regularly counsels government
contractors regarding compliance matters and has conducted numerous internal investigations of alleged misconduct by government contractors. Ms. Sacilotto is also an adjunct faculty member
at George Mason Law School. Thank you for being here today, Ms.
Sacilotto.
Chairman MULVANEY. Thank you, Ms. Chu. And welcome, Ms.
Sacilotto as well.
We will begin with Mr. Murphy. Mr. Murphy.
STATEMENT OF MIKE MURPHY
Mr. MURPHY. Thank you. Thank you, Chairman Mulvaney and

Ranking Member Chu for the opportunity to testify on the 3 percent withholding law. I am testifying on behalf of the Associated
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General Contractors of America, a national Trade Association representing more than 32,000 companies, including 7,000 of Americas leading general contractors and 11,000 specialty contractors.
My name is Mike Murphy. I am president of Turner Murphy
Company. My dad, Turner Murphy, started our company in 1950.
We are a third-generation construction company based in Rock
Hill, South Carolina. Today we work primarily on wastewater and
water treatment plants construction ranging in size from $100,000
to $25 million. We employ seven full-time employees in the office
and 20 to 40 in the field depending on how much work we have.
However, I believe Congress is making it tougher and tougher for
my company to stay in business by not repealing a requirement
that will make federal, state, and local governments withhold 3
percent from each and every payment to contractors for goods and
services.
This withholding applies to the total contract, not to the taxable
net revenue generated from a project. This provision has nothing
to do with my companys tax liability. It is just an accounting gimmick that whitewashes over the real costs of government while
leaving small companies like mine holding the bag.
This 3 percent holding is more than the profit margin on most
public construction contracts for companies like mine. The average
take-home after taxes for construction is 3.2 percent, and for smaller construction companies, 25 million and under, the margin is
closer to 1.6 percent. So the 3 percent withholding is almost 200
percent of the total profit for small companies.
Local, state, and federal governments already hold five to 10 percent on our payments until project completion. Retainage is different than this withholding requirement in that it is tied directly
to the project and is released when the project is completed. The
3 percent withholding is not tied to the project nor based on any
project performance criteria. It is not released when the project is
completed. It is held for as much as a year or more. It is just an
interest-free loan to the federal government.
This withholding also affects critical parts of my business such
as cash flow and bonding capacity. When the public owner I am
working for withholds 3 percent from each and every payment it
causes my company to finance more of the work on the project
without being paid for it. This ripples down to my suppliers, subcontractors, and service providers. Some suppliers ask for payment
upfront, which means I am paying for things before even being reimbursed by the government entity. The additional 3 percent withholding will make this process even worse, which could possibly
hamper the ability of some general contractors to pay their subcontractors in a timely manner.
This reduced cash flow would also restrict bonding capacity
which is a key to my company being able to bid on projects. Federal
law requires that construction contractors carry several types of
bonds. Surety companies who provide the bonds study my books in
detail before offering coverage. Based on past performance on contracts, the suitability of my company to perform the work for which
I bid, my assets, and my cash flow, surety gives Turner Murphy
Company a bond rating which governs the price of the bonds and
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how much bonded coverage I can receive. My ability to get bonding
directly impacts how much work my company can take on.
Implementation of this law could not come at a worse time for
my company and my industry. The construction industry went into
a recession a year and a half before the overall economy and still
has not emerged from it. The industry has lost nearly a third of
its workers and nearly a third of the construction put in place since
2006. The tough economic conditions have made competition on
public jobs fierce and profit margins tight. We are seeing more and
more bidders on a dwindling number of projects. This causes many
companies to shave more and more out of profit margins in hope
of actually getting the job.
What is truly frustrating for us is that there are already policies
in place that prevent the kind of tax behavior this law is designed
to stop. Instead of punishing all contractors, the federal government should enforce the laws already on the books. Existing laws
require all corporations to make quarterly estimated tax payments
to cover income tax liabilities. These laws should be vigorously enforced, and on public projects all of our jobs are bonded. Having
bonds on projects ensures the taxpayers that the jobs will be completed at no additional cost to the public.
This new 3 percent withholding law is just another layer of red
tape that creates serious cash flow problems for government contractors in perhaps the worst industry conditions in modern times.
It does not help solve a problem by using solutions that are already
on the books. It is just a bad public policy. Three percent withholding on government contracts will seriously impact my business
and the businesses of the construction industry at large. The vast
majority of the members of the contracting community are responsible taxpayers. Do not punish the whole industry because of a few
bad apples.
Again, thank you for the opportunity to testify on behalf of ADC,
and I appreciate the fact that three members of the Subcommittee
and six members of the Full Committee have co-sponsored this legislation. I look forward to any questions that you may have that
will help get the rest of you to co-sponsor H.R. 674.
[The statement of Mr. Murphy follows:]
Chairman MULVANEY. Thank you, Mr. Murphy. I appreciate
that.
Mr. Frost, you are recognized for up to five minutes.
STATEMENT OF IAN FROST
Mr. FROST. Chairman Mulvaney, Ranking Member Chu, and

members of the Committee. I appreciate the opportunity to testify
today on the three percent withholding mandate, and particularly
its impact on small firms that contract with federal, state, and
local entities of government.
My name is Ian Frost and I am the president of EEE Consulting.
We are a small engineering firm based in Richmond, Virginia. I am
here to ask for your assistance in repealing the three percent withholding rule.
As you know, in 2006, Congress included a provision in the Conference Report for the Tax Increase Prevention and Reconciliation
Act that requires federal, state, and local governments that spend
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more than $100 million a year on goods and services to withhold
three percent from payments to engineering firms and other contractors. I am also a member of the American Council of Engineering Companies, ACEC, the voice of Americas engineering industry.
ACEC firms number more than 5,000, over 70 percent of which are
small firms. Most have government clients, and like EEE Consulting, would be negatively affected by the three percent withholding mandate.
EEE Consulting has been in business since 1998 and has grown
to a 36-person firm with revenues of about $4.3 million last year.
About 95 percent of our work is for local, state, and federal agencies. During one of the most difficult economic periods that we have
lived through, we have experienced steady growth. Since the recession started, we have actually added 13 new employees, five of
whom were unemployed. We also signed an agreement to build a
new office just as the recession hit. Despite a lot of trepidation over
the economic forecast, we stayed the course on the new building
and moved in during the spring of 2010. Our success could not
have occurred without an unencumbered cash flow. We have relied
upon the personal finances of our owners and the companys cash
reserves to buy new equipment, to pay the salaries of new employees until we get paid by our clients, and to pay for expansion of
the company, including the new construction.
To a small business, cash flow is everything. I am immensely
proud of our past record, yet concerned about the future because
the pending three percent withholding rule would negatively affect
our cash flow and our potential to grow and add new jobs. If enacted right now, the rule would mean the withholding of approximately $130,000 of our projected 2011 revenue and it might require
our company to secure a loan to help us cover operating expenses
at a time when cash in the bank is limited. The withholding could
limit our ability to make payroll each month, our ability to expand
our business, and hire new employees. A $130,000 withholding
each year would deplete our cash reserves by about 30 percent.
Our situation is not unique. Our trade association, ACEC, has
raised serious concerns over how this mandate will impact engineering firms, including thousands of small firms like mine that
work for government. Many engineering companies realize a profit
margin of just about three to five percent on a contract, and withholding three percent up front for tax purposes will force them to
divert funds needed to complete the contract, thereby creating cash
flow problems. Three percent withholding will also burden small
firms with additional administrative and recordkeeping costs.
Firms like mine will have to modify their accounting systems in
order to keep track of the withholding and ensure that it matches
with their tax records and tax refunds.
I frequently hear in the news that small businesses are the economic engine for the country and are likely to be the main source
of job creation that is needed to reduce our unemployment rate.
Why then would the federal government want to handcuff that economic engine by withholding a percentage of our contracts, hurting
our cash flow, and limiting our ability to add new jobs?
I know that the withholding rule is intended to help with tax collections, but it seems unreasonable to punish everyone involved in
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government contracting due to the actions of just a few. The only
solution to this problem is to repeal the three percent withholding
mandate and replace it with measures that target firms and individuals that are not in compliance with the tax laws.
I have attached to my testimony a list compiled by the Government Withholding Relief Coalition of tax compliance measures that
have been enacted since the three percent withholding provision
was passed in 2006. For example, in 2008, the Federal Acquisition
Regulation was amended to require potential federal contractors to
certify that they are in compliance with their federal tax obligations. This provision makes noncompliance with the tax code
grounds for suspension and debarment from government contracting. Measures such as this focus on the problem instead of impacting firms that pay their taxes.
As an owner of a small business, I ask you to help give us relief
from the unfair withholding rule. Please find alternatives that ensure that the government receives its share of our revenue without
damaging our ability to operate, add new jobs, and meet our payroll.
Thank you for the opportunity to participate in todays hearing,
and I would be happy to respond to any questions.
[The statement of Mr. Frost follows:]
Chairman MULVANEY Thank you, Mr. Frost. And as I mentioned,
we will take questions for the whole panel after the testimony is
finished.
Mr. Gaffney, you are recognized for up to five minutes.
STATEMENT OF JAMES M. GAFFNEY
Mr. GAFFNEY. Good morning, Chairman Mulvaney and members

of the House Small Business Committee, Subcommittee on Contracting. On Contracting and Work Force. Thank you, Chairman
Mulvaney, for holding this important hearing today and for inviting me and my association to participate.
My name is Jim Gaffney, and I am the principal owner of a small
business mechanical construction firm, Goshen Mechanical Contractors, located in Malvern, Pennsylvania. My firm operates in the
public sector construction markets throughout the greater Philadelphia area, in the Delaware Valley, and throughout Southeastern
Pennsylvania. Our firm performs many public sector construction
projects in which I am prime and subcontractor, such as public
school new construction and retrofits and other municipal facilities,
both as a prime and as the sub, with a variety of public sector entities that will be covered by the 3 percent withholding tax unfunded
mandate if it is not repealed before it takes effect January 1, 2013.
I am here today representing the Mechanical Contractors Association of America. MCAA is a nationwide specialty construction
employer trade association based in Rockville, Maryland. MCAAs
member companies perform all types of mechanical, plumbing,
heating and ventilation, new construction and maintenance, and
service work for public project owners nationwide. The vast majority of MCAA members companies are small businesses and many
of them perform projects of the type that will be covered by the 3
percent withholding unfunded mandate.
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I am also president of the Mechanical Contractors Association of
Eastern Pennsylvania, which is based on the Philadelphia area and
which counts a majority of small business contractors among its
100 members. Many of those firms, too, perform projects for government entities that will be covered by the 3 percent withholding
mandate. I am also privileged to represent four other of our sister
associations in an ongoing legislative quality construction alliance.
These groups are the Sheet Metal and Air Conditioning Contractors National Association, the International Council of Employees
of Bricklayers and Allied Craft Workers, the Finishing Contractors
Association, and the Association of Union Constructors. According
to the Bureau of Labor statistic figures, specialty construction employers present the vast majority of industry employment and over
64 percent of the employment overall in the industry. The majority
of the QCA association member companies, too, are small businesses and they, too, perform a great deal of public work projects
with the governmental entities that will be covered by the 3 percent withholding mandate if it should go forward in 2013.
I should add that many of the QCA groups also actively participate in a wider government withholding relief coalition, which also
adamantly espouses rapid repeal of the 3 percent withholding provision in Section 511 of the Tax Reconciliation Act of 2005 and the
QCA fully supports that coalitions written remarks filed on the
record for this hearing.
My business is the American dream. I started my business 25
years ago in the basement of my mother and fathers home. We
worked in the field by day and we bid at night and on the weekends. The only real downtime that I had was on Sundays for mass
and breakfast with my wife and four children. Today we have over
20 employees and have work on hand of over $8 million.
The tax, quite honestly, will put me out of business. Last week
I bid a project in a school district in Lower Merion outside of Philadelphia where I took the job for four percent just to keep the cash
flow rolling. I lost the job by 3 percent. With retainage being held
on these projects at 10 percent plus 3 percent, small business will
be replaced by large brokers that will end up causing the end-user
more money. Not only will the overall costs go up, but trust me,
the quality of work will go down. As a prime contractor, I will not
be able to hold the 3 percent on my subs. As a subcontractor, the
prime will incorporate some kind of language to exclude the 3 percent from my invoices.
I have been in business for over 25 years. I pay my taxes every
year and on time. It is very easy to determine what my taxes are
by the billing systems that are used on our projects. For each
project I must submit a detailed breakdown for the project before
it startslabor, material, equipment, everything. Soup to nuts.
Once it is approved, I bill percentages each month for that work
that was performed. Each month a CM, project manager, or owners representative requires a walk-through to visually confirm all
the work that I have on my invoice has been completed.
Once my financial statements are updatedand they are done
every three to six months because the bonding company in this
economy is on our backs every daythese projects are listed showing the percentages that are completed and our taxes are based on
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that information. And with the restrictions and the quality background checks that are done in the state of Pennsylvania on a lot
of the local states and school district work, they actually require
me to submit my financial statement before the project is bid. They
make me have my accountant notarize that financial statement
and sign a letter of non-collusion.
I hear from many economists that in these challenging times
most people do not get it on how bad the economy is until the bomb
goes off. I see a lit fuse with this tax. Between the extra costs needed for my office staff to track the tax withholdings and the extra
work needed from my accountant, I am looking at at least a 24 percent increase in my costs for recordings.
Thank you for your time.
[The statement of Mr. Gaffney follows:]
Chairman MULVANEY. Thank you, Mr. Gaffney.
Ms. Sacilotto, thank you for waiting. You are recognized for up
to five minutes.
STATEMENT OF KARA M. SACILOTTO
Ms. SACILOTTO. Thank you, Chairman Mulvaney, Ranking Member Chu, and members of the Subcommittee for the invitation to
participate in todays hearing.
You have heard firsthand from others regarding the economic impact of the 3 percent withholding on businesses and the enormous
administrative costs the law will impose on federal, state, and local
governments. I share those concerns but my testimony today focuses on a different aspect of the problem, the disruptive and costly
impact of the withholding requirement on the federal procurement
system, impacts that will likely be experienced by state and local
governments as well. My testimony today is mine alone and does
not represent the views of my firm or any of its clients.
Today I address three impacts and why I believe government has
the tools available already to target delinquent taxpaying contractors, making implementation of an across-the-board withholding
that bears no rational relationship to past or future tax liability
unnecessary. First, the 3 percent withholding undercuts federal
policies and programs intended to assist small businesses in contracting with the federal government. These policies and programs
which I describe in my written testimony are designed to ease the
cash flow burdens on small businesses, remove barriers to entry,
and otherwise promote small business participation in federal contracting. The 3 percent withholding requirement, however, directly
undermines these policies by destabilizing cash flows. It will disproportionately harm small businesses and likely deter the innovative small businesses government is trying to attract from entering
the federal marketplace at all.
Second, the 3 percent withholding will discourage commercial
item contractors from selling their products to government. Congress has enacted laws to encourage vendors of commercial items
to sell their products to government so that government can take
advantage of innovative, commercially available products, as well
as commercial pricing. Over the past decade, however, as the pendulum of regulation has swung back in favor of oversight, commercial item contractors have found themselves subject to more and
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more of the regulations that apply to their noncommercial counterparts but that have no equivalent in the commercial marketplace.
The 3 percent withholding and the costs of complying with and administering it are yet another added cost of doing business with the
government. Given a choice of customers, it is entirely reasonable
to believe that vendors of commercial items will decline to incur
this additional cost. Government will then face reduced competition
for acquisitions of commercial items, diminished access to innovative commercial products, and more than likely increased costs because the costs of dealing with the government no longer reflect the
costs of the commercial marketplace.
Third, there will likely be increased disputes between contractors
and the government. Determining whether a contract has been materially modified such that the withholding would apply to contracts entered into prior to December 31, 2012, or if as the IRS proposes the government can apply the withholding to payments
under any contract after January 2014, regardless whether the underlying contract includes provisions that permit such a withholding, are just two areas where disputes will arise. Acquisition
regulations provide that if government wishes to add a new requirement or clause to an existing contract or make some other
change that increases the contractors costs, the contractor is entitled to compensation for the cost of the change. Thus, in addition
to disputes that will likely arise when parties attempt to true up
the withholdings, disputes will arise whether the government is
even entitled to include the withholding requirement in the first instance and the cost for doing so.
There are likely many more negative impacts on the procurement
system that will surface if this provision is allowed to take effect.
If there is good news to this story it would be that there are existing enforcement tools that make imposing this costly and burdensome requirement unnecessary.
You have heard today about the IRS Federal Levy program that
targets tax debt. This current law now permits the IRS to levy or
offset up to 100 percent of any specified payment due to a vendor
of goods or services sold or leased to the federal government. You
have also heard that current regulations require contracting officers to determine whether a contractor is responsible prior to the
award of any federal contract. To assist with this responsibility determination, acquisition regulations were amended in 2008 to require contractors submitting proposals to certify whether they have
tax debt over $3,000. Contractors also are now required to report
in a database largely available to the public but fully available to
contracting officers civil administrative or criminal findings of liability or penalties over $5,000. Acquisition regulations were further amended to permit the government to suspend or debar a contractor from contracting with the government entirely for being delinquent in federal taxes. In 2010, the White House instructed the
IRS and OMB to review the certifications and report whether delinquent contractors were receiving contract awards.
In closing, I do not wish to diminish the seriousness of a failure
to pay taxes but note that the system has mechanisms in place
that can target delinquent taxpayers without harming taxpaying
contractors. Given these existing mechanisms, the perceived bene-
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fits of the 3 percent withholding are vastly outweighed by the burdens and costs the withholding will oppose.
Thank you again for this opportunity to share my views, and I
am happy to address any questions you may have.
[The statement of Ms. Sacilotto follows:]
Chairman MULVANEY. Thank you, Ms. Sacilotto.
I have a few questions for the panel. First to Mr. Murphy. Mr.
Murphy, one of the things we have heard regularly today is that
one of the fears here is that contractors will simply add this additional 3 percent to their bids and as a result prices will go up for
everybody, including the taxpayer. But I understand from your testimonyI think you mentioned it brieflyit is actually worse than
that. In your industry you cannot do that. Is that right?
Mr. MURPHY. That is correct.
Chairman MULVANEY. Tell me why that is.
Mr. MURPHY. Our margins are so tight now there is always
somebody that is willing to take the job cheaper, as Mr. Gaffney
said, for one percent. And normally that added cost you would pass
on but in this industry and the market we are in now you just cannot do it. It is just something else we are going to have to absorb.
Another brick we are going to have to put in our load.
Chairman MULVANEY. You and Mr. Gaffney both mentioned the
concept of retainage, which I am familiar with but I am not sure
everybody else here is. When youtell us a little bit about how
that works, how retainage works generally.
Mr. MURPHY. Okay. We have a contract with an entity, let us say
Rock Hill. Say $5 million. The first pay request we send in is, say,
for $100,000. Well, they pay us $90,000 of that $100,000. They hold
the other 10 percent until the project is complete and you have
passed certain milestones. So over the course of that project it will
gowhatever the progress payments are, by the end of the project
they have got a half million dollars of your money.
Chairman MULVANEY. But you can get that money upon completion?
Mr. MURPHY. Right. It is up to us. When we finish, the sooner
we finish, the sooner we get the money. With this money, we are
up towe are leaving it up to our good friends here in Washington
to decide when and how we are going to get it.
Chairman MULVANEY. And that is what I think a lot of people
do not understand about the proposals is that retainage, which everyone in the industry is familiar with, you get when the project
is finished. This 3 percent withholding is different. You do not get
this 3 percent withholding back until you pay your taxes for the
year in which the project finished. So you could finish a project in
January of 2012 and not actually get your money until April 15th
of 2013. So it is not retainage, although I have heard a lot of people
say this is similar to retainage. It is just another 3 percent
retainage. And it is actually much worse than that.
We have asked a couple of folksI will ask Mr. Frost and Mr.
Gaffney and Ms. Sacilotto as well because I think you mentioned
the legalities of thiswhy is another short-term extension not a solution? And I put that to anyone who wants to speak to it.
Mr. GAFFNEY. For me personally, the problem I have is we just
cannot affordif I am bidding a project that is going on for two
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years or three years and this could be implemented in the middle
of the project, we are having to walk away from it. So I am not
bidding the work today for any of the long-term projects just because of the fear that this could come into play in the backend of
the project, in the last year of the project. We just cannot afford
it. I just could not do that. So that is why it is impacting us today.
Chairman MULVANEY. Ms. Sacilotto.
Ms. SACILOTTO. Sure. Well, contracts every day are being entered
into and some of those contracts are long-term contracts. They are
not goingthey are not just for the next couple of years. They are
for the next five, seven, 10 years. And there are no provisions in
the Federal Acquisition Regulation now that implement this 3 percent withholding. Yet, there are plenty of provisions that require
the government to pay its bills on time and pay them in full. So
we have a lot of instability in the market right now as contractors
are trying to figure out, well, how am I going to deal with this. And
contracting officers do not really have the tools necessary. As we
can see, people are still trying to figure out how to implement this.
So as contracts are being entered into now there is a great deal of
uncertainty. Having instability in any market is obviously not a
positive thing.
Mr. FROST. And let me add to that, if I may. You mentioned that
if it was delayed would that be helpful. And of course there would
be some advantage there but you heard the gentleman from the
Department of Defense speak to the fact that they are already
planning for that and incurring costs associated with that planning, as is industry. And so if we are incurring costs when the ultimate outcome is going to hopefully be repeal of that mandate, then
why not repeal it now?
Chairman MULVANEY. And I think Mr. Loftis said the same
thing. The states are doing the same thing in anticipation of it.
Mr. FROST. Exactly.
Chairman MULVANEY. Mr. Murphy, you had an addition?
Mr. MURPHY. To me, putting it off another day does not help because it is still a bad policy. It is not going to be any better a year
from now, or two years from now, or three years from now.
Chairman MULVANEY. Mr. Murphy, you mentioned one thing
and this will be my final questionthat caught my attention. You
mentioned that the average margin to a contractor of your size, 3.2
percent I think you mentioned. And then you mentioned that for
a lot of the subs who are smaller than you it was down as low as
1.6 percent. And I think that drove home for me how dramatic the
impactwhile the impact of this bill would be felt industry-wide,
the smaller the business the more dramatic it would be. How would
your subs be able to operate under this system?
Mr. MURPHY. Like Mr. Gaffney said, some of these you would not
be able to pass it on to them. They would just go out of business
because a lot of these guys that we deal with, concrete finishers
and some mason stuff, you have to pay them every week. You hold
3 percent for a year on them, they would just go out of business.
Or they would quit doing work with you.
Chairman MULVANEY. Thank you very much. I will recognize Ms.
Chu for as much time as she would like.
Ms. CHU. Thank you.
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I wanted to follow up on several of the issues you raised. Ms.
Sacilotto. Ms. Sacilotto, one of the central themes of your testimony
was that the 3 percent withholding rule undermines other government initiatives established to promote economic growth for small
firms. Can you explain how those traditionally disadvantaged
firms, such as minority-owned or women-owned firms would be impacted?
Ms. SACILOTTO. Sure. I can give youwell, if a company cannot
raise money to operate its business, obviously any policy that we
put into effect, just at a broad level, is not going to be effective because it will be driven from the market. But a specific policy that
is put into effect in the Federal Acquisition Regulation and even
more so by DOD is to give small businesses a greater percentage
of their progress payments. So a traditional large business, the default is 80 percent of your costs. Small businesses, depending on
whether it is with a civilian agency or DOD, can get up to 95 percent of their progress payments. And there is also, you heard mentioned, a DOD policy that was recently enacted to accelerate payments to small businesses. Well, shaving off 3 percent is obviously
directly undermining those policies that are meant to assist small
business with contracting with the government. It undermines
the notion that you will get paid faster yet you will get paid less
is not exactly equal.
Ms. CHU. You also raised the issue pertaining to Federal Acquisition Regulationcomplex federal contracting regulations already
serve as a huge barrier to small firms seeking government work.
Can you elaborate on how federal acquisition regulations would be
modified if the 3 percent withholding became effective and what
this would mean for small businesses in the contracting arena?
Ms. SACILOTTO. Honestly, I think that the repercussions are
going to be enormous. And I have not studied this but I have been
thinking about recently the Prompt Payment Act. The Prompt Payment Act is a government law that was enacted because the federal
government did not have rules about when it paid its invoices. So
sometimes it was paying too late and incurring interest, and sometimes it was paying too early and losing the time value of its
money. So the Prompt Payment Act has rules about when you pay
your invoices. And if you do not pay your invoices on time, the contractor is entitled to interest. If the government pays early, there
are certain clauses that are in the FAR, which is the Federal Acquisition Regulation, that allow the government to get a discount
for paying early.
It seems to me that the entire prompt payment system is going
to beis completely broken. If the government can essentially not
pay promptly 3 percent of the payments that are owed, are they
going to incur interest on that because they are not paying it
promptly? And the idea of this was the government was realizing
it was losing a vast amount of moneythe time value of money by
paying too early. Well, contractors are now losing that time value
of money by paying their taxes early. So should the government get
a discount for paying early when it is withholding 3 percent of the
money? This is just one tiny little aspect of the contract process
that I think will be affected by this 3 percent withholding. This applies to small businesses, large businesses, all businesses. And con-
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tracting officers and our acquisition workforce who are stretched
thin already are going to have to try to figure out how to deal with
this.
Ms. CHU. And my final question has to do with those commercial
item vendors, those small businesses that offer all kinds of items,
including high tech products that would be available on the commercial market. In your testimony you mentioned that 3 percent
withholding would disproportionately dissuade commercial item
contractors. What is unique about this industry that would create
this situation?
Ms. SACILOTTO. Well, when you think about a commercial item
contractor you are thinking about somebody whoa company thats
business is not tailored to, you know, perhaps building a bomb or
something that is specific to the federal government. It is providing
perhaps IT services and cloud computing and things that I do not
even know about because they are so high tech and innovative.
Well, they can sell their products out on the free market to companies, to businesses, to anybody. They do not have to necessarily
they are not beholden to the federal government for this. It is a
great market to enter into but is it such a great market to enter
into when I have this 3 percent withholding and every other cost
of doing business? As a small innovative business, if I have options,
this will definitely make me consider whether or not it is worth it
to come into the federal marketplace.
Chairman MULVANEY. I recognize the gentle lady from North
Carolina, Ms. Ellmers, for up to five minutes.
Ms. ELLMERS. Thank you, Mr. Chairman.
Ms. Sacilotto, my question for you is you had outlined that there
are already provisions in place that should be dealing with these
issues as far as, you know, the revenue coming in, the tax burden,
that we may be lost. Is that correct that you feel they are already
in place?
Ms. SACILOTTO. Yes.
Ms. ELLMERS. And yet they are not being adhered to?
Ms. SACILOTTO. Well, that I do not know from an IRS perspective
whether or not they are being adhered to. I believe that a number
of laws have been passed recently to allow the IRS to withhold
more and more money. I would say that the recent GAO report
that came out that the chairman mentioned, there were 15 cases
of delinquent taxpayers that were, I guess, emphasized in that report. The IRS has gone after all 15 of them so I cannot say that
it is not working.
Ms. ELLMERS. Well, based on the information that we have and
considering that there are things that are already in place, why do
you, you know, it seems to me the impetus for this is to find this
money, this 3 percent withholding in order to help pay for that or
to find that or to locate those monies that might not be coming in
and, you know, pretty much put that burden on all of our good taxpaying citizens because of those few that do not. If, in fact, those
things that are already in place really do not seem to be working,
why would this work? In your opinion, what would make this the
golden egg of finding tax revenue?
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Ms. SACILOTTO. Well, I do not think this is the golden egg of finding tax revenue. And like I said, I cannot say that those measures
are not working. Some of the evidence suggests that they really
are. And to go back to this GAO report, I would say that thisthat
reportit is unfortunate that there are contractors who do not pay
their taxes. Nobody is going to defend that. But if you read the report, it was only five percent of the contracts that were actually examined.
Forty-five percent of the taxes at issue that they found owing
were exciseI am sorry, payroll taxes. They were non-income
taxes. So will this help that? No. It will not get that entire 45 percent of the problem that was identified. Also, half of the delinquent
taxpayers were subrecipients and I think in my mind I think of a
subrecipient as a subcontractor. Well, subcontractors are not subject to the withholding. It applies to the prime contractor.
Ms. ELLMERS. To the prime contractor.
Ms. SACILOTTO. Right. So that is under the IRS rule. So you are
not getting all of those people. So, right there that is not getting
all of the problems. There was an addition. Oh, and then the fact
that the IRS is actuallyit is taking enforcement actions against
all 15 of the cases that it said were known really bad actors. Well,
that to me suggests that the system is not broken. That we need
to just focus on using the tools that we have available already rather than adding an additional tool.
Ms. ELLMERS. Thank you.
Mr. Gaffney, if I am not mistaken I believe you had said that if
this were to be put in place today it would cost you about 24 percent more to do business.
Mr. GAFFNEY. Correct.
Ms. ELLMERS. And you would literally have to close your doors.
Is that correct?
Mr. GAFFNEY. When I say that I know it sounds like it is dramatic.
Ms. ELLMERS. No, no. It is not.
Mr. GAFFNEY. It is the truth. In our business, you know, my
mother is in the office, my sisters are in the office. When the girls
are doing the accounting everyday downstairs we would actually
have to come down, track down all our vendors which on a given
project could be in the hundreds, make sure that the 3 percent is
held from the vendor, from the subcontractor, from another material supplier, and so forth and so on. And 24 percent is probably
a low number but I wanted to be conservative. And it will put us
out for the reason that there is no money to the developers today.
So in the Philadelphia area and the surrounding areas in Pennsylvania, there is no money for the developers. There is no cash flow
out there. So a lot of the smaller businesses tend to go into the
work that is either government at the state, local, whatever the
case may be. With this 3 percent that goes in there, we just cannot
do it. We cannot do it.
For the most part, right now small businesses in my area are
taking jobs for just about nothing, just to keep the money coming
in so the bonding company is happy and the banks are happy for
the line of credit. If it was not for that, we would be gone. With
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that 3 percent being held for whatever the period of time is, it is
coming. It is just a matter of time.
Ms. ELLMERS. Thank you. Mr. Chairman, can I have one more
minute forI would like to ask Mr. Frost and Mr. Murphy
Chairman MULVANEY. With no objection you are recognized for
an additional minute.
Ms. ELLMERS. Okay. Mr. Frost and Mr. Murphy, I just wanted
to ask both of you, you know, as business owners, I believe, Mr.
Murphy, you had said that basically this wouldfor your projected
income of 2011 or your projected project it would cost you about
$100,000. Is that
Mr. MURPHY. Well
Ms. ELLMERS. I am sorry, Mr. Frost, you had said
Mr. FROST. We would lose about $130,000 of revenue if it was in
todays dollars.
Ms. ELLMERS. Simply just to adhere to this?
Mr. FROST. Yes.
Ms. ELLMERS. In your opinion, how many jobs wouldif you
know that that is a cost that you are not going to have to incur,
can you createwould you be able to go out today and hire someone else to work under you?
Mr. FROST. It would be extremely difficult. As I said, our history
has been that we have been hiring people and we have been able
to do that because our cash flow has allowed us to. We would have
to take loans if we were going to hire additional people to cover
their payroll until we got paid by the federal government or the
federal, state, and local governments.
Ms. ELLMERS. Sure. And Mr. Murphy, if you could answer that
as well.
Mr. MURPHY. I agree with Mr. Frost and I will make one comment about cash flow. A guy told me this a long time ago. It is not
air but it is pretty close to it. So it is that important.
Ms. ELLMERS. Well, absolutely. And you know, again, and in your
opinion for both of you, you know, if we justif we just put this
off for a few months or a year you are still going to be in the same
situation because you are still going to be faced with that uncertainty. Correct?
Mr. MURPHY. The uncertainty of it and the inevitability of it if
it happens. I mean, it is not like it is going to be easier to take
a year from now.
Ms. ELLMERS. Right. Thank you so much for your testimony. I
reallyit has been invaluable to this situation. Thank you.
Mr. MURPHY. Thank you.
Chairman MULVANEY. Thank you, Ms. Ellmers. And that provides a good closing for the whole meeting. Thank you for everybody who came. Thanks especially to the folks who came from outof-town. I appreciate you incurring the time and the expense to do
that. I do not think that folks who come to testify often recognize
how important these hearings are and how valuable they can be to
shed light on issues that ordinarily would not see the light of day.
This is not an issue that makes the front page of the Wall Street
Journal or the New York Times, but this is an absolutely critical
issue for your economy, for our small businesses, and as you can
tell, for state and local government, the Department of Defense.
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This is an important issue and the fact that you were able to come
today, give us your testimony in writing, have a chance to give us
your oral testimony and then take questions is extraordinarily
helpful to us as we try and push this bill through on what appears
is going to be to all aspects a bipartisan basis. So I really appreciatethe anecdotes especially help us explain to our colleagues exactly how important this is, how powerful a change this would be
if we do not fix it, so I appreciate everyones time.
With that I would ask unanimous consent that we have five legislative days to submit statements and supporting materials for the
record. And without objection, thank you all to everybody who
came. And that will conclude this meeting.
[Whereupon, at 11:35 a.m., the subcommittee was adjourned.]
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CERTIFICATE OF NOTARY PUBLIC
DISTRICT OF COLUMBIA
I, Christine Allen, notary public in and for the District of Columbia, do hereby certify that the foregoing PROCEEDING was duly
recorded and thereafter reduced to print under my direction; that
the witnesses were sworn to tell the truth under penalty of perjury;
that said transcript is a true record of the testimony given by witnesses; that I am neither counsel for, related to, nor employed by
any of the parties to the action in which this proceeding was called;
and, furthermore, that I am not a relative or employee of any attorney or counsel employed by the parties hereto, nor financially or
otherwise interested in the outcome of this action.
llllllllllllllllllll
Notary Public, in and for the District of Columbia
My Commission Expires: January 14, 2013
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Insert offset folio 255/400 here 67299A.166
199

House Hearing, 112TH Congress - Defer No More: The Need To Repeal The 3% Withholding Provision

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House Hearing, 112TH Congress - Defer No More: The Need To Repeal The 3% Withholding Provision

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DEFER NO MORE: THE NEED TO REPEAL THE

SUBCOMMITTEE ON CONTRACTING AND

COMMITTEE ON SMALL BUSINESS

Small Business Committee Document Number 112017

U.S. GOVERNMENT PRINTING OFFICE

For sale by the Superintendent of Documents, U.S. Government Printing Office

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srobinson on DSK4SPTVN1PROD with HEARING

HOUSE COMMITTEE ON SMALL BUSINESS

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LORI SALLEY, Staff Director

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02:22 Jul 22, 2011

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srobinson on DSK4SPTVN1PROD with HEARING

National Defense Industrial Association ...............................................................

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DEFER NO MORE: THE NEED TO REPEAL THE

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THURSDAY, MAY 26, 2011

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srobinson on DSK4SPTVN1PROD with HEARING

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srobinson on DSK4SPTVN1PROD with HEARING

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srobinson on DSK4SPTVN1PROD with HEARING

smallest of firms since many prime contractors may be compelled

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Chairman MULVANEY. And our first panelist is our colleague,

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STATEMENT OF WALLY HERGER

Mr. HERGER. Chairman Mulvaney, Ranking Member Chu, and

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srobinson on DSK4SPTVN1PROD with HEARING

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23:16 Jul 21, 2011

srobinson on DSK4SPTVN1PROD with HEARING

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srobinson on DSK4SPTVN1PROD with HEARING

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STATEMENT OF CURTIS M. LOFTIS, JR.

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STATEMENT OF BRIAN GEORGE

Mr. GEORGE. Chairman Mulvaney, Congresswoman Chu, and

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